Currency update, August 13: risk aversion hits global markets

Published: 13 August, 2010

Currency update for August 13 from Smart Currency Exchange: mixed week for sterling which ended the week up against the euro and down against the US dollar as a fresh wave of risk aversion hit global markets.

Sterling hit a new six month high of $1.5999/ £1 on Monday but then dropped to a two week low of $1.5565/£1 on Thursday. The reason for this sudden increase in risk aversion was as a result of Wednesday's Bank of England quarterly inflation report.

This was a key assessment of the new government's spending cuts and tax hikes and as a result, growth forecasts were slashed and inflation is expected to be well within the target 2% level within two years. More importantly, the Bank left the door wide open for further emergency Quantitative Easing if it is needed. This left financial markets concerned over UK recovery.

Poor housing data and lower consumer confidence added to sterling's problems and the strength against the Euro was related to risk aversion caused by the US economy.

In the Euro zone, sterling has broken out of the tight range we have seen over the last two weeks against the euro after the US Federal Reserve voted to inject further money to jumpstart the flagging US recovery. This saw investors pull out of riskier euro assets and buy into the safer currencies of US dollar and sterling. As a result, the euro lost over 2% against the US dollar and 1% against sterling. Poor data from Greece and a drop in European industrial output on Thursday kept the euro under pressure.

Against the US dollar, sterling jumped to a six month high against US dollar this week, but since Monday sterling has been on a downward trend after the Federal Reserve announced further Quantitative Easing. On Wednesday, the decision was made that the US economy had underperformed for the last quarter and as such, it needed a further boost. As a result, risk aversion is back in play and there is strong demand for the safe haven US dollars despite major concerns over the US economy.

Now might be a good time to secure prices to stop the market moving further against you as some analysts are predicting a return to the $1.40s. Today could be interesting too, as according to some research, an estimated 17-21 million people in the USA are afflicted by a fear of Friday the 13th (or friggatriskaidekaphobia) and the US economy loses between $800-$900m as people become too afraid to leave the house.

Elsewhere, retail sales in New Zealand came in far better than expected and as a result, the New Zealand dollar has outperformed major counterparts overnight. This countered last week's disappointing unemployment rate and many traders questioned whether the central bank would in fact need to raise interest rates further in the year.

* Smart Currency Exchange is a currency partner to Harpers Wine and Spirit. Harpers Wine and Spirit has teamed up with Smart to provide readers with a free bespoke currency service.

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